I Squared's Wireline Approach Insufficient For Advanced Market

I Squared's purchase of HGC is welcome, but maintaining a pure wireline strategy would not fit the highly-competitive Hong Kong market, which is increasingly geared towards advanced multi-play services. Hong Kong Broadband Network would be a suitable acquisition, as it is an established wireline player with a growing MVNO user base.

Hutchison Telecommunications Hong Kong (HTHKH) has sold Hutchison Global Communications (HGC), the wireline arm of its telecoms business, to Asia Cube Global Communications for HKD14.5bn (USD1.85bn). Our previous view that HCG would appeal mostly to private equity investors played out, as Asia Cube is a subsidiary of I Squared Capital, a private equity firm ( see 'Hutchison Telecoms Sale: Wharf Tie-Up Most Likely', May 17 2017). Domestically, HGC is a relatively small player focused on the high-value enterprise sector. As I Squared Capital wants to invest in high-growth markets, it might try to buy more assets to create a converged services player that can provide more credible local competition.

Wireline Voice In Decline

Hong Kong Wireline Voice And Broadband Forecasts

f = BMI forecast. Sources: OFCA, BMI

We expect consolidation efforts in the Hong Kong market in the short to medium term, since operators benefit from scale in implementing converged service strategies. A strong candidate to be bought by I Squared Capital would be Hong Kong Broadband Network (HKBN). The company is a major wireline operator in the territory, and launched an MVNO in September 2016. The MVNO has attracted 200,000 subscribers in 10 months, more than half of which are multi-play subscribers, bundled with broadband, fixed voice or OTT entertainment content. With such promising growth as well as a presence in mobile and wireline markets, consolidation with HGC's wireline assets could transform the combined entity into a quad-play operator that can leverage its scale and compete effectively with the incumbent PCCW-HKT.

Notably, HGC also owns and operates a global submarine cable network as well as points of presence in key international communications markets. It is possible that I Squared has bought HGC with a view to selling that part of the business on to a third party, as it does not obviously fit its country-specific investment strategy. Alternatively, it may look to hive off the local wireline part of the business and sell that on, in which case amalgamation with HKBN would still be an attractive proposition.

This is a particularly suitable strategy for the Hong Kong market, as the market has advanced to a point where operators differentiate themselves through services rather than networks. Furthermore, Hong Kong's telecoms market is particularly mature with about 220% mobile penetration and wireline voice services in decline. As such, revenue growth must come from premiumisation and advanced services, so a multi-play strategy is essential.

We forecast wireline voice subscriptions to fall to 3.8mn by 2021, from 4.2mn in 2016. Broadband has a positive outlook: we forecast 3.1mn subscribers by 2021, up from almost 2.6 in 2016. Further consolidation and emphasis on converged service competition poses upside risks to both forecasts.